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Latin Amirica dI'd the CariCeIInTechnical Depairtm11enit
Ret'^i()Mt1 StUdiCS PRo (I-.ill
Report No. 17
Infrastructure Maintenance in LAC:The Costs of Neglect and Options for Improvement
Volume 3ID. <4
Water Supply and Sanitation SectorP LOU)L-4
v .
byCDooc' o'to
8 ~° >< n Guillermo Yepes
2g II >Infrastructure and Energy Division
,r oX H,-4 a>X11 X:D
June 1992
Pe in this series ar not formal publications of the WorldBak. Tbey present preiminay and unpolbised mdults of country analyis or researchthat is circulbted to e.courqe discussion and comment; any citation and the use of this paper should take ccount of its provisiorial chabncter. Tfindings. interpretations, and conclusions expred in this paper are entirely those of the author(s) and should not be attributed in any man tothe World Bank, its affiliated or3anizations. members of its Board of Executive Directors or the countries they rpresent.
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Other Reports in the Series
No. 1: World Bank Strategy for the Natural Gas Sector in LAC, March 1991
No. 2: Women in Development: Issues for Latin American Caribbean Region, April 1991
No. 3: Easing the Poor Through Economic Crisis and Adjustment: The Story of Bolivia'sEmergency Social Fund, May 1991
No. 4: Direct Credit for Privatized Firms, June 1991
No. 5: Decentralization to Local Government in LAC: National Strategies and LocalResponse in Planning, Spending and Management, July 1991
No. 6: Mexico Labor Retraining Program: Poverty Alleviation and Contribution to Growth,August 1991
No. 7: The Evolution, Situation, and Prospects of the Electric Power Sector in the LatinAmerican and Caribbean Countries, August 1991
No. 8: Choice of Nutritional Status Indicators for Young Children in Public Health Programs,September 1991
No. 9: Developing Educational Assessment Systems in Latin America, September 1991
No. 10: Women's Employment & Pay in Latin America, October 1991Part I: Overview and MethodologyPart If: Country Case Studies
No. 11: Feeding Latin America's Children: An Analytical Survey of Food Programs,November 1991.
No. 12: Incentive Structure & Resolution of Financial Institution Distress: Latin AmericanExperience, November 1991.
No. 13: Tax Administration in Latin America, January 1992.
No. 14: Public Policies and Deforestation: A Case Study of Costa Rica, February 1992
No. 15: Auctioning Credit: Vol. 1: Conceptual Issues; Vol. II: The Case of Chile;Vol. III: The Case of Bolivia, January 1992.
No. 16: Economic Policies and Performance under Alternative Trade Regimes: Latin AmericaDuring the 80s, April 1992.
TABIE OF CONTENTS
EXECUTiVE SUMMARY .............................................. Iil]Introduction ............. ...... iEvidenceandcostsofinadequatemaintnance inLAC.[iii]
Water Qulty .................................... 1 iii JContinuh of Service .................................... [ iii JUnaccountedfor Water .................................... iv I
The maintenance problem in retrospect ................................. I vi IA strategy to improve maintenance .................................. [ vii
AccountabUy iy. ............................................ [vii]Infornadon Systems ........................................... [vii]Investment Analysis and Cost Recovery .............................. [vii]Training . ................................................. [ vii]Private Sector Particiaon in 0 ................................ [viii]
INTRODUCTION ................................................ 1
EVIDENCE AND COSTS OF INADEQUATE MAINTENANCE IN LAC ............. [31Water Quatity . ............................................. [4]Continuity of Service . ......................................... [7]Unaccountedfor Water . ......................................... [8 J
THE MAIENANCE PROBLEM IN RETROSPECT ........................ 131Institutional/Managerial. .- [-.-....14]Operaonal .[ 15]Budgeting and Finncia .[17]
A STRATEGY TO IMPROVE MAINTENANCE ............................ [ 181Accountabgity ..........................--- [19]Informion Systems ............ [20]Investments Analysis and Cost Recovery .......................... [ 211Raining .22]Pivte Sector Participation in O&M .-----.- [23]
THE ROLE OF THE BANK .. [................. 25]
BIBUOGRAPHY ...................-.-.---. 271
Annexes
1. Case Study: The Cost of High Unaccounted for Water in Bogota2. Case Study: The Cost of an Unreliable Supply in TegucigalpaI::;. ............ ...... ~L oam 4T L.~
WATER AND SANITATION SECrOR
MAINENANCE IN THE COS1 OF NEGLECT ANDOPrIONS FOR EMPROVEMET
INIRODUCTION
1. Adequate maintence of public water and sanitation infrastructure benefitsindividuals and national economies alike. Dependable, high-quality water supplyand effective sewerage services, however, are not the product of money alone;building, and especially maintning these public works require a shared vision,commitment of time and energy, as well as the skills of people thrcu-hout thepublic and pnvate sectors.
2. Maintenance is conceived as the set of activities that enables systems todeliver, in an efficiently, the outputs for which they were designed. Therefore,maintenance implies the upkeep not only of the physical infrastructure but alsoof the management systems and institutional capacity necessary to obtain themaximum social benefits from this infrastructure.
3. Water supply and sewerage infrastructure is a large industry in LatinAmerica and thc Caribbean (LAC). It is estimated that in 1990 some 352 millionpeople had access to public water supply, 76 percent of tl 'im through houseconnections. To serve this many people, some 60 to 70 million cubic meters(Mm3) of water are produced every day and distributed through 400,000kilometers (kmn) of pipes. In addition, 253 million people make use of asewerage system. These systems comprise about 320,000 km of pipes, and about50 to 60 Mm3 per day of [mostly] untreated sewage are discharged into nearbywater bodies. The replacement value of these assets is estimated at someUS$120 billion. About 400,000 people are employed directly by this industry.Still, there are some 77 million people with no access to a public water supply,and 176 million do not have adequate sanitation facilities. To meet the needs ofthese people, and of about 90 million more based on projected populationgrowth, estimated annual investments of US$10 billion are needed throughoutthis decade.
4. Unfortunately, all the available evidence indicates that existinginfrastructure is not well maintained; furthermore, the institutional capacity tomaintain this infrastructure has yet to be fully developed. A major problem withmaintenance programs is the lack of visibility and the fact that the consequencesof maintenance neglect are often not well identified at the outset. Maintenancespending does not generate the excitement associated with new capital projects.Along with being invisible, maintenance is not politically or professionallycompelling.
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5. The costs of this neglect are large. They have an economic dimensionwhen, for instance, overall efficiency decreases and production costs increaseas a result of heavy water losses that force the premature construction of newproduction facilities, or when public health is jeopardized because of poor waterquality, or when private finns or families have to build backup facilities atgreater cost to compensate for an unreliable service. They also have a sectoraldimension when the premature deterioration of assets increases operating costs;and water losses mean a loss of revenue to the utility. Equally important, thereare equity considerations to maintenance neglect: (a) the poor suffer the mostfrom bad service, as they often lack the resources to compensate for ananomalous situation; and (b) consumers are often required to pay higher ratesto compensate for inefficiencies in the system.
6. About US$10 to 15 billion are urgently needed to correct the most urgentproblems and to upgrade rundown facilities to bring the existing infrastructureto acceptable service standards. On a regional basis, sector companies are losinosome US$1.0 to 1.5 billion every year in revenues and additional operating costson account of avoidable commercial and physical losses--and this at a time ofconstraints on financial resources to expand and improve the systems.
EVIDENCE AND COSTS OF INADEQUATE MAINTENANCE IN LAC
7. Operations and maintenance (O&M) are two distinct but closely relatedfunctions. The results of good or bad operations and maintenance are oftendifficult to separate. Water quality problems, for instance, can be the result ofpoor operating practices, such as lack of chemicals or poorly trained operators,or of poor maintenance, such as broken treatment equipment and chemicalfeeders, or a combination of both.
8. The paucity of data at the country level concerning O&M operations in thesector in LAC is a serious impediment to a comprehensive assessment of thecosts of maintenance neglect on a country basis. The lack of data is by itself atestimony to the lack of awareness of sector officials and the low priorityassigned to the O&M functions. However, some information is available at theutility level that can be used to illustrate the main points and support theconclusions and recommendations made in this paper.
9. The chief manifestations of inadequate maintenance in many public waterand sanitation systems are: (a) gm water Lquahlt; (b) intermittent LmJlie andunreliable sevices; and (c) high levels of water losses. These undesirableresults clearly point to a lack of concern by sector management providingexcellent services to Jhe users of water and sanitation systems.
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Water Quality
10. Water quality affects public health, public acceptance of a water supplyand the cost of providing safe water. Providing good quality water andmaintaining this quality in the distribution system are two of the most significanttasks facing the water utility industry. They are becoming more demanding, asincreasing industrial, agricultural and municipal pollution loads makepreservation of raw water quality and its treatment an increasingly complex job.Inadequate maintenance of the distribution system can also affect water quality,as sediments or scaling products in pipes provide protection for bacteria andother microorganisms. The need for routine programs to control water qualityand to flush distribution systems and storage facilities should be evident but isnot a practice often followed by many utilities in the region.
11. No systematic assessment of the costs of inadequate water quality has beenmade in any LAC country, but they are likely to be substantial. The increase inmorbidity from waterborne diseases in some countries in the region can beattributed, to a large extent, to a deterioration of water quality. Morbidity fromwater borne diseases, for instance, increased by a factor of 4.9 in Mexico in thedecade of the 1980s and by a factor of 2.2 from 1980 to 1985 in Pem. Therecent cholera epidemic in Peru is a tragic testimony to years of neglect of thewater and sanitation infrastructure. In Costa Rica, about one-third of aU waterconsumed does not meet ell WHO water quality guidelines. In Colombia, two-thirds of the population served by a public water supply system in towns witha population less than 100,000 drinks water of unacceptable bacteriologicalquality. In Guatemala, 85 percent of the water samples taken in some 234communities was not bacteriologically safe. In Mexico, 20 percent of the watersupply systems was reported to have unreliable chlorination facilities. InPanama City, the main sewage pumping station has been inoperative for someyears because of lack of parts, and qewage overflows have created an unhealthyenvironment in a highly valuable area of the city. In Mexico, 95 percent of allmunicipal waste water plants was inoperative, thus failing to reduce the alreadyalarming levels of pollution in all major watershed basins of the country-whichhelps to epla, in part, the increase in morbidity from waterbore diseases.
Coniduay of SerWce
12. Continuity of service is a very important performance indicator of theindustry and the one of which the population at large is probably moreconscious. Intermittent water supplies are at best a nuisance; at worst, they alsopose significant health hazards, as contminated water can easily find its wayinto pipe distribution systems. Intermittent water supply service is a seriousproblem in many cities in the region, but probably nowhere is it more severethan in Peru, where 30 percent of the users in cities other than the three largestreceives water only 10 hours a day or less. In Lima, which harbors half of theurban poplation of Peru, there is widespread water rationing in spite of
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adequate production capacity, and 70 percent of the water distribution districtsare operted at water pressurev below the minimum standards to ensure adequateservice. Extensive areas of Caracas suffer from intermittent services, whileproduction capacity of the water treatment plants has been reduced by 36percent because of lack of adequate maintenance.
13. The costs of building alternative supplies to compensate for an unreliablewater service can be substantial. In Lima, for instance, domestic users havebeen investing in pumping and water storage tank facilities at costs 40 to 80times higher than those of the public utility. In Tegucigalpa, investments byhouseholds to compensate for an unreliable supply would have been sufficientto almost double the city water supply with deep wells. The cost to the poor thatprocure water from vendors is five times the level of investments needed todevelop a reliable supply to attend to their needs.
Unaccounted for Water
14. High levels of unaccounted for water (UFW - the difference betweenmetered production and metered consumption as a percentage of meteredproduction) are always associated with inadequate maintenance practices of boththe physical as well as the software (commercial) infrastructure. UFW,therefore, includes physical and non-physical or commercial losses. High leveisof UFW reflect the failure to repair leaks and meters, replace old pipes, detectillegal connections, implement good commercial practices, and meter all usesof water.
15. Water has to be captured at the source, treated, and delivered toconsumers. In the process, some of this water is lost to the benefit of no one.Some of this water loss is unavoidable, but most is not. Physical losses are,thus, an economic loss to society and a financial loss to the water industry.Commercial losses on the other hand are associated with water consumption thatis not metered or paid for (i.e. free consumption). Commercial losses are,therefore, a financial loss to the company, but they do not necessarily representan economic loss as consumers benefit from the use of this water. Commerciallosses, however, increase consumption and production and, thus, can aggravatethe level of physical losses. Wlthin this context, commercial losses are also aneconomic cost.
16. Good operational and managerial practices of water utilities in theindustrialized countnes have resulted in UFW values of about 10 to 15 percentof net production. UFW in well-run utilities in these countries is related, by far,to leaks in pipes and to a lesser extent to meter underregistration. The situationin most LAC countres is quite different. Recent well documented studies inCosta Rica (1988) and Bogota, Colombia (1990) and other cities serve toconfirm that commercial losses are the main contributing factor to UFW; theyrepresent 51 percent of total losses in Costa Rica and 65 percent in Bogota. In
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Caracas, some 30 percent of all connections are not registered in the commercialsystem. In Panama, the increase in T)FW from 37 to over 50 percent in recentyears is for the most part due to an increase in the number of unregistered orunmetered connections. In Lima, only a handful of some 160,000 metersinstalled in the mid-1980s ar', operative today.
17. The location of Mexico City makes the development of additional sourcesof water supply very costly. In spite of this, sector authorities do not have acredible plan to meter consumption, maintain meters and reduce the number ofillegal connections. The magnitude of this neglect, coupled with low rates,requires a federal subsidy in excess of US$l billion a year (0.6 % of GDP) andequivalent to the annual sector investment needed to supply the total populationof Mexico with adequate water and sanitation services by the end of thiscentury.
18. The level of physical losses due to not maintaining the distribution networkfacilities in the region is also troublesome. Pipes have not been replaced inmany cities at rates to compensate for old age and physico-chemicaldeterioration. In Buenos Aires, for instance, 65 percent of the pipes are morethan 60 years old. In Lima, pipe replacements are a small fraction of needs.Pipe breaks in many distribution systems often exceed accepted industrystandards.
19. In Bogota, UFW increased from 22 percent in 1975 to 40 percent in 1989.Revenue losses due to the increase in commercial losses have been estimated tobe equivalent to at least 25 percent of total billings, or US$39 million in 1989alone. If captured, these financial resources would have been more thanadequate to meet all debt service obligations (US$195 million) during thisperiod. In Costa Rica, the national sector company estimates a loss of incomeof some US$8 million per year on account of commercial losses, or 24 percentof planned investments over the next five years. In Guatemala City, a reductionof physical losses from 25 percent to 15 percent over 10 years would reducecapital expenditures on new production by one-third.
20. The lack of reliable data of where and when consumption is taking placehas also hampered attempts to improve operations of the distribution system ofmany cities, such as Lima, Panama City, Barranquilla and Guayaquil, and to ill-conceived and therefore ineffective plans to reduce UFW. Many such plans havebeen a source of disappointing results. Unreliable production and consumptiondata have also led to poor demand projections, usul*y overestimates, andtherefore, to costly investments. Many Bank financed water supply projects havesuffered from this problem; Bogota, San Jose and Guayaquil, to name only afew, are cases in point.
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THE MAINTEANCE PRIBLEM IN RETROSPECT
21. Maiiy factors contribute, often in a synergistic way, to the lack ofadequate maintenance of most water and sanitation infrastructure in the regionand to poor services. These include: IDstiatu aLM&nageri--unclear roles ofcentral and local govemment agencies, and shortage of experienced managersand skdlled technicians aggravated by lack of formal training programs;Qpcdanal--inadequate information on systems and costs, misplaced prioritiesdue to lack of adequate evaluation of investments, and inadequate designs,control of operations and use of indicators of performance; B_cdgiingljnancia--unhealthy dependency on central budgets, and inadequate cost recovery policiesthat fail to generate adequate financial resources.
22. International lending and donor agencies have, at times, given wrongsignals or encouraged less than optimum investments, as they have not providedadequate support for the removal of long standing maintenance problems and foradequate maintenance programs being in place before new construction projectsare supported. Bank appraisal and sector reports do make reference to problemson maintenance, however, only a few have attempted to quantify the magnitudeand the costs of this neglect. Many rehabilitation projects would benefit froma more comprehensive analysis of monitoring indicators of operations andmaintenance that can be used to gauge progress. Part of the problem, asmentioned in this report, is the lack of data, but a contributing factor is thatmost Bank staff working in the sector lack expertise in operations andmaintenance.
A STRATEGY TO IMPROVE MAINTENANCE
23. Good maintenance is cost effective and requires: a strong commitmentto provide excellent service; informing public and officials about the costs andbenefits involved to obtain their support for adequately funded maintenanceprograms; and good management information and accounting systems. Effectivemanagement technology and grant money for new investments are not sufficientto guarantee success in achieving good maintenance. The complexity of thesesystems and their attendant problems demand a comprehensive strategy. Sucha strategy should: (a) impo accounMblft (b) develorg and mainhin
onsive managemen information and data sytes; (c) imrveaaysis oinvestinents and cost recovmf; and (d) improve training of stuf. Maintenancecan also be enhanced, and its costs reduced, by fostering the paicato of theiiae sector and making the best use of its comparative advantages. Progress
on these fronts entails actions in the Manag sdalJnatitutional areas to clarify therespective roles of the central, regional and local governments in theconstruction, management, financing and regulation of water and sanitationinfrastructure and to change manageal perceptions and practices.
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AccourMbility
24. The delegation of responsibilities for water and sanitation to local agenciesneeds to be followed by delegation of the necessary authority to recover costsand mobilize resources to sustain O&M. Central governments, on the otherhand, need to regulate services more effectively in order to promote efficiency,to apply consistent policies concerning evaluation and cost sharing ofinvestments and to remove the bias against expenditures on operations andmaintenance. They should also resist the temptation to subsidize services thatshould be on a commercial basis.
Infomiadon Systems
25. Most sector agencies need to assign resources for the development ofreliable and current records of existing facilities and operations. These sho-.'dinclude systematic recording and monitoring of maintenance history to identify--particularly troublesome sections or units &.d to cure the underlying causesrather than the symptoms. This information should be complemented by reliableunit costs of maintenance operations and new facilities. Information on facilitiesand costs should, in turn, be used to develop indicators to help decide when aunit needs maintenance or should be replaced.
Investment Analysis and Cost Recovery
26. There is an urgent need to apply more rigorous cost/benefit analysis tonew investment and maintenance expenditures. The O&M planning,programming and budgeting process should begin with the inventory andclassification of assets and the establishment of quality standards of service toset the level of O&M to be provided. In turn, these needs should be translatedinto quantity standards and resource requirements. Adequate levels of O&M arelikely to be achieved if goals and the assessment of resource needs are forwardlooking, framed in 3- to S-year plans and complemented with specific andmonitoring indicators to assess progress.
27. But investment analysis, planning and budgeting of maintenance cannotgo too far if the utility is under severe financial stress because it is not allowedto, or does not attempt to, recover its maintenance, operating and investmentcosts. A sound maintenance strategy must include a sound financial one whichincludes not only a forceful plan to have tariffs that reflect costs but an equallyconvicing one for billing and collection and for reducing unnecessary costs.
7hining
28. The assessment of O&M problems should place greater emphasis on stafftaining needs and motivation and possibilities for introducing betteremployment conditions. O&M strategies are enhanced by raising the awareness
l viii l
of operational staff and by giving recognition to blue collar occupations andvocational training.
29. The inadequate staffing of O&M functions is a critical and most difficultissue. The often poor working conditions and difficulties in reducing redundantstaff are obstacles to reconciling the demand and supply of O&M skills throughfiring and hiring. A systematic training effort for existing staff is, therefore, akey element of any effort to improve O&M. The end result is that sectorinstitutions need to take a more assertive role in shaping training programs tofill this void.
30. Public education can go a long way to help improve the maintenanceeffort of an utility. Therefore, it is important that sector agencies make astronger effort to develop and maintain public education campaigns to keep thepublic and officials well informed on what the goals of the utility are, how theybenefit the public and how the public can contribute to make these goals areality.
Private Sector Participation in O&M
31. The experience in many countries and in the region clearly shows thatparticipation of the private sector in O&M can be productive and effective.Private firms can provide many of these services more efficiently than publicutilities, owing to better management, greater flexibility and accountability andtheir ability to retain more skilled personnel.
32. The water utility of Santiago de Chile, EMOS, has been highly successfulin the use of private contractors for O&M functions. In 1989, some 34 O&Mcontracts equivalent to 48 percent of operating costs were made with the privatesector. Through this strategy, the company has been able to reduce costs andtoday is credited as being one of the most efficient sector companies in theregion in terms of the number of staff per population served. EMOS also reportsa reduction in response time and better attention to users.
33. Areas of operations and maintenance where the participation of the privatesector has proven to be cost effective include: ;t .ter reading, installation andmaintenance; billing and collection of service payments; transport services;maintenance and repair of water and sewerage networks; maintenance and repairof house connections; data processing centers; and water and waste watertreatment plants and pumping stations.
34. Successful O&M contracts with the private sector should span severalyears, usually not less than five, to elicit a good response from potential biddersand to allow and justify a reasonable investment and commitment on the part ofthe contractor. It is also in the interest of public utilities to provide incentivesin O&M contracts with the private sector to encourage more cost effective
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services. On the other hand, private firms should face the real possibility oflosing contracts or profitability for inadequate performance. Equivalentincentives or sanctions geneally do not exist for public agencies. To achievethe desired objectives of quality and cost-effectiveness, the utility must retainvery important responsibilities for planning, packaging, procuring andsupervision of these contracts.
INTRODUCTION
1. The connection between infrastructure and economic growth is generallyaccepted, but difficult to quantify. Nonetheless, agreement is widespread thatadequate maintenance of public water and sanitation infrastructure would benefitindividuals and national economies alike. Dependable, high-quality water supplyand effective sewerage services, however, are not the product of money alone;building and, in particular, maintaining these public works require a sharedvision, commitment of time and energy, and the skills of people throughout thepublic and private sectors.
2. The concept of maintenance, as understood in this paper, goes beyond theconventional definition of the term which implies tne upkeep of property orequipment. Maintenance is conceived as the set of activities which enablessystems to deliver, in an efficient way, the outputs for which they weredesigned. Therefore, maintenance implies the upkeep not only of the physicalinfrastructure but also of the management systems and institutional capacitynecessary to obtain the maximum social benefits from this infrastructure.
3. Water supply and sewerage infrastructure is a large industry in LAC. Itis estimated that in 1990 some 352 million people had access to a public watersupply, 'i6 percent of them through house connections. To serve this manypeople, some 60 to 70 million cubic meters (Mm3) of water are produced everyday and distributed through 400,000 kilometers of pipes. In addition, 253million people make use of a sewerage system. These systems comprise about320,000 kilometers of pipes, and about 50 to 60 Mm3 per day of [mostly]untreated sewage are discharged into nearby water bodies. The replacementvalue of these assets is estimated at some US$120 billion. About 400,000 peopleare employed directly by this industry.
4. Still, there are some 77 million people with no access to a public watersupply, and 176 million do not have adequate sanitation facilities. To meet theneeds of these people and of about 90 million more on account of projectedpopulation growth, estimated annual investments of US$10 billion are neededthroughout this decade.
5. Unfortunately, aU the evidence available indicates that the existinginfrastructure is not well maintained and, furthermore, that the institutionalcapacity to maintain it has yet to be fully developed. Pervasive problems withwater delivered to consumers that does not meet minimum World HealthOrganization (WHO) drinking water quality guidelines, with intermittentsupp!ies and with high water losses are testimony to infrstructure neglect inLAC. About US$10 to 15 billion are urgendy needed to correct the most urgentproblems and to upgrade rundown facilities to bring the existing infrastructureto acceptable service standards (Figure 1). On a regional basis, sector companies
(21
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6. The costs of this neglect are lre. They have an economic dimensionwhen, for instance, OVWxal efficiency dereases and production costs increaseas a result of large water losses that force the construction of new productionfacilities or when public health is jeopardize because of poor water quality orwhen private firms or families have to build backup facilities, at greater cost,to compensate for an unreliable service. In as much as water supply andsewerage systems exhibit substantial economies of scale and, thus, the costs toindividuals who attempt to compensate for deficiencies in the provision of theseservices are much higher, they also have a sectoral dimension when theprematue deterioration of assets increass operating costs and water losses meana loss of revenue to the utility and an increase in operating costs. Equallyimportant, there are equity considerations to mitnceneglect: (a) the poorsuffer the most from bad senrie, as they often lack the resources to compensatefor an anomalous situion; and (b) paying consumers are often required to payhiaer lotes to compensate for in,0iioences in t ie syrevm
7. A major problem with mainteoavce programs is the laci of visibility.Because the effects of postpofcng maintenance are not immediately obvious,whinen,afor is the element that is easiest to defer and the one most siy ti becut from the cufrent eo mense budget. Muilndeace spending does not generate
[31Table I
the excitement associatd T;b: 1with new capital projects. ThE EF4PQRPolitica and profesional ? I A:rewards have played animportant role in this trend,since new construction vealefficiency de'creas and'-projects carry moreprofessional and poitical ;glamour. Along with being d .Premature eeWratin inaeasesinvisible, maintenance is notpoliticaly or professionally - > f .e-en:ecompelling. ........
8. Public and political ; e y -awareness can be raised by and ..c.. ..k.addproviding understandable and .convincing information oninfrastructure conditions, 'W0 f tperformance, maintenance tCOfPl.teo.
costs and the costs ofdeferring maintenance. It ..pe .ef ...fcesis ndi means actively educating thepublic - as shareholders ofthe nation's capital stock -and public officials - as trustees of this capital - about the importance of thelong-term integrity of the system. In fact, public education is an importantelement of any strategy to improve any nation's infrastructure.
9. This paper is an attempt to: (a) list the major consequences ofmaintenance neglect; (b) quantify some of the economic, financiai and socialcosts associated therewith; (c) explain the principal reasons for maintenanceneglect; and (d) propose options to improve maintenance. The importance ofextending the useful life of existing facilities through improvement ofmaintenance becomes more and more relevant, as investment demands are largeand funds scarce.
EVIDENCE AND COSTS OF INADEQUATE MAINTENANCE IN LAC
10. Operations and maintenance (O&M) are two distinct but closely relatedfunctions. in fact, they are complementary 'acets of the task of providing a goodserice, and as such, they are intimately intertwined. The results of good [orbad] operations and maintenance are, therefore, often difficult to separate.Water quality problems, for instance, can be the result of poor operatingpractices, such as lack of chemicals or poorly trained operators, or of poormaintenance, such as broken down treatment equipment and chemical feeders,or a combination of both. Likewise, improper operation of the distribution
[41
system can lead to high pressures and a corresponding increase in water losses.High water losses can also be the result of poorly maintained commercialsystems.
11. The lack of adequate and timely maintenance of many water and seweragefacilities in LAC has led not only to premature failure of these systems but tounreliable services and the loss of capacity of many installations. It has alsomade necessary the construction of new works, particularly production facilities,in an attempt to compensate for this lack of reliability and lost capacity.
12. The paucity of data, at the country level, about O&M operations in thesector in LAC is a serious impediment to a comprehensive assessment of thecosts of maintenance neglect on a country basis. The lack of data is by itself atestimony to the lack of awareness of sector officials and to the low priorityassigned to the O&M functions. Some information is available, however, at theutility level that can be used to imlustrate the main points and to support theconclusions and recommendations made in this paper. However, an importantcaveat must be made. The examples presented in this paper may give theimpression that the utilities mentioned are the ones with the most problems. Thefact that reliable O&M data are available is often a positive sign that the utilityin question has at least identified the problem and is trying to do somethingabout it. Adequate operational and monitoring data are almost always associatedwith good performing utilities that, by definition, show concern aboutmaintenance.
13. The main manifestations of inadequate maintenance in many public waterand sanitation systems are: (a) gm water qguam"l; (b) intermittent suplies and,mrelable serices; and (c) high levels of water losses. These undesirable resultsclearly point to a iack of concern, by sector management, in providing excellentservices to the users of water and sanitation systems.
Water Quality
14. Water quality affects public health, public acceptance of a water supplyand the cost of providing safe water. Providing good quality water andmaintaining this quality in the distribution system are two of the most significanttasks facing the water utility industry. They are becoming more demanding, asincreasing industrial, agncultural and municipal pollution loads makepreservation of raw water quality and its treatment an increasingly complex job.But many times, the problem is not given the attention it needs until expensivechanges or repairs are required.
15. Water quality problems can be aggravated by inadequate maintenancepractices that are reflected in inoperative water and waste water treatmentplants. These problems are compounded by lack of chemicals and poorly trainedwater treatment operators. hadequate maintenance of the distribution system can
[SITable 2
also affect water qmuaty.The accumulation of depositsor scaling products in pipes Aprovides protection for SQbacteria and othermicroorganisms. Once there,these organisms can. l.j*$f MitySapereproduce and cause undesirable tastes, odors andslime. They can also promote 1 vcorrosion themselves. Water s 0 zi;quality problems can go azounnoticed for long periods of ........
time because of insufficient gmonitoring and control ofwater quality at the treatmentplant and distribution system. The need for routine programs to control waterquality and to flush distribution systems and storage facilities should be evidentbut is not a practice often followed by many utilities in the region.
16. Close monitoring of water quality at the treatment plant and thedistribution system is, therefore, a practice followed by all good water utilitiesto reduce water quality problems and enforced by regulatory agencies. Watersamples should be taken from representative points in the distribution systemfrecquently enough to establish the bacteriological and chemical suitability ofwater in all parts of the system (Table 2). Many utilities have fancy waterquality control laboratories but fail to retain the specialized manpower andresources needed to operate and maintain them. Water quality control, an almostforgotten function of regulatory or supervisory agencies in the region, is atroublesome aspect of maintenance in most systems in the region, particularlysmaU ones (cities less than 100,000).
17. No systematic Tabk 3assessment of the costs ofinadequate water quality hasbeen made in any LAC )*lDOfo UEqzi mkdncountry, but if the experienceo in the US can serve as a F f ~ ~ Wb Zbtdguide (Table 3), where . ~ f~f.Y$~mJi.iwrtconcemns about water quality 1UmelSatare more prevalent, they are Rblikely to be substantial. Thehealth impact of inadequatesupplies can also besubstantial. The increase in morbidity from water borne diseases in somecountries in the region can be attributed, to a large extent, to a deterioration in
[6J
water quality. Morbidity from water borne diseases, for instance, increased bya factor of about 5 in Mexico in the decade of the 1980s and by a factor of 2from 1980 to 1985 in Peru.
18. The recent cholera epidemic in Peru is a tragic testimony to years ofneglect of water quality and of water and sanitation services. Some 61,000probable cases, of which 15,000 were hospitalized and 321 died in the firstmonth of this outbreak, give a grim view of the cost and suffering. A recentinvestigation (9) found evidence of bacteriological contamination of the watersupply in the cities of Lima, Piura and Trujillo. Ground water supplies in Limawere not chlorinated before being pumped into the distribution system. Close to20 percent of the water samples from the distribution system in the Lima-Callaoarea tested positive for fecal coliforms. In Piura, several production wells wereout of operation because of mechanical failure, and residual chlorine levels wereinadequate (chlonnation equipment was not working satisfactorily]. The cholerapathogen was isolated from three community taps in shanty towns in this city.In Trujillo, water service was not continuous, and water samples from thedistribution system tested positive for fecal coliforms [three tested positive forcholera].
19. In Costa Rica, estimates by the Water Institute of Costa Rica (AYA)indicate that about one-third of all water consumed does not meet all WHOwater quality guidelines (13). In Colombia, two-thirds of the population servedby a public water supply system in towns with a population less than 100,000drinks water of unacceptable bacteriological quality (Table 4) (19). A sun'eycarried out by IMFOM in Guatemala in the late 1980s indicated that 85 percentof the water samples taken in some 234 communities was not bacteriologicallysafe and that chlorine was out of stock for six months. In Mexico, 20 percentof the water supply systems was reported to have unreliable chlorinationfacilities in the mid-1980s.
20. Water quality deterioration in the distribution system adds to the cost ofwater services, beyond those associated with health problems, in several waysincluding:
* Increased pumping costs as a result of accumulation of scalingproducts and tuberculations in pipes that restrict water flow;
* Accelerated internal corrosion rates resulting in the need torehabilitate or replace water mains and infrastructure parts;
* Additional water treatment costs by households, commerce andindustry.
21. In Panama City, the main sewage pumping station has been inoperativefor some years due to lack of parts, and sewage overflows have created an
[71Table 4
unheathy environment in a : -highly valuable area of thecity. In Mexico, it wasestimated that in the mid-1980s the sector was PplI* f4 os)*Uk aeallocating between 5 and 10 lpercent of the resources 8 ) Zneeded for good operation ...and maintenance of water s S P.-- -n.ateand waste water treatmentplants. It came as no surpriseto find that only 5 percent of 3. ...al municipal waste water 36plants were operative at the )5 WI) B R
time. The economic cost of 1 D0 61)these idle waste treatment 500-1500plants is substantial. These> 5 DD 8Dnon-operating plants fil toreduce the already alarming . , &.Cm-)levels of pollution in all themajor watershed basins of ...the country which helps toexplain, in part, the increase in morbidity from water borne diseases (para. 17).Viewed from a pragmatic point of view, these idle resources, valued at morethat US$1 billion, could have been invested to increase service coverage ofsanitation services in a country where some 40 million do not have access to apublic sewerage system.
Continuity of Seruice
22. Continuity of service is one very important performance indicator of theindustry and one that the population at large is probably more conscious of.Continuity is affected by inadequate maintenance programs that result inunreliable service and frequent equipment failures and by high water losses.
23. Intermittent water supplies are at best a nuisance but at worst they alsopose significant health hazards, as contaminated water can easily find its wayinto pipe distribution systems. The result is a heavy cost to all customers of thesystem to compensate for this failure. Some are forced to invest in additionalinfrastructure and others, mostly the poor, have to purchase water from vendorswhich is also likely to be of dubious quality (Annex 2).
24. An intermittent water supply service is a serious problem in many citiesin the region, but probably nowhere is it more severe than in Peru where 30percent of the users in cities other than the three largest receives water only 10hours a day or less. In Lima, which harbors half of the urban populadon of
Peru, there is widespread water rationing in spite of adequate productioncapacity (parm. 37), and 70 percent of the water distribution districts is operatedat water pressures below the minimum standards to ensure adequate service.Extensive areas of Caracas suffer from intermittent services while productioncapacity of the water treatment plants has been reduced by 36 percent due tolack of adequate maintenance.
25. The costs of building alternative supplies to compensate for an unreliablewater service can also be substantial. In Lima, for instance, domestic users havebeen investing in pumping and water storage tank facilities at costs 40 to 80times higher than those of the public utility. In Tegucigalpa, a city of some halfa million people, households have invested between US$3 and 9 million fortanks and pumping systems to compensate for an unreliable supply (Annex 2);the cost to almost double the city water supply with deep wells is well withinthis range. The cost to the poor that procure water from vendors is five timesthe cost of investments needed to develop a reliable supply to attend to theirneeds.
26. The use of in-house storage tanks is a widespread practice throughout theregion and has its roots in the failure to maintain a reliable service. Thispractice is expensive, given the large economies of scales associated with theconstruction of storage tanks. It also raises health concerns, as most housestorage tanks are seldom cleaned.
27. In Buenos Aires, production capacity at the water treatment plants hasbeen reduced by 30 percent due to lack of maintenance. In addition, 15 percentof production is lost at the largest water treatment plant due to leaky valves andinadequate operations, or about 3 times the average in well operated plants. Theend result is that some 3 million people have to rely for their supply on 700,000private wells that draw water from contaminated ground water sources.
28. The use of private wells is also a common occurrence in many cities inthe region, such as Santo Domingo, Lima and Guatemala City. The cost ofwater from private wells is several times higher than the cost, on a unit basis,of a public system. In addition, the quality of the water from these wells is oftensuspect, and unfortunately, only a handful of users routinely monitor it.
Unaccounted for Water
29. High levels of unaccounted for water (UFW - difference between meteredproduction and metered consumption as a percentage of metered production) arealways associated with inadequate maintenance practices of both the physical aswell as the software (commercial) infrastructure. UFW, therefore, includesphysical and non-physical or commercial losses. High levels of UFW reflect thefailure to repair leaks and meters, replace old pipes, detect illegal connections,implement good commercial practices and monitor aU uses of water.
191
30. Water has to be Tabie Scaptured at the source,..treated and delivered to the 2 .... SO.consumers. In this process, . JAC W ) )RWTRsome of this water is lost tothe benefit of no one. Some -of this water loss is .... .: 'Punavoidable, but most is not. .........Physical losses are an ,_ p 'an (89) 12economic loss to society and A S (88 1a financial loss to the water =industry. Csn~ wrg 8)5
31. Commercial losses on &rni- () 3Bthe other hand are associated with water consumption notmetered or paid for (i.e. freeconsumption). This is theresult of fraudulent, unbilled or free consumption and of faulty meters thatunder-register the amounts consumed. Commercial losses are, therefore, afinancial loss to the company. They do not necessarily represent an economicloss, as consumers benefit from the use of this water. Commercial losses,however, increase consumption and production and, thus, can aggravate thelevel of physical losses. As a result, the system's capacity needs to be expandedearlier than otherwise needed. Within this context, commercial losses are alsoan economic cost. There are also economic as well as financial losses associatedwith commercial losses, as there are additional operating costs to divert, treatand deliver this water.
32. Good operational and managerial practices of water utilities in theindustrialized countries have resulted in UFW values of about 10 to 15 percentof net production (Table 5). UFW in well run utilities in these countries isrelated, by far, to leaks in pipes and to a lesser extent to meter under-registration. Losses due to illegal connections or unregistered users arenegligible. The situation in most LAC countries is quite different.
33. Recent well documented eagineering studies in Costa Rica (1988) andBogota (1990) and other cities serve to confirm that commercial losses are themain contributing factor to UFW. Commercial losses represent 51 percent oftotal losses in Costa Rica, 65 percent in Bogota and 55 percent in Medellin(Figures 2 and 3).
34. The increase in illegal connections observed in many utilities in the regionis a direct consequence of lukewarm enforcement efforts to discourageunauthorized use and maintain the commercial system up-to-date, including tightprocedures to account for new connections. This increase can go unnoticed for
[101
COMPOSITION OF WATER LOSSES
COCOT am JOsE, C.R.
arvfmet*r.w Naoroswtearing13a 12X
SIVx Pluslel .
*XIX
SU~~~~~~~i
Six~~~~~~~~a
Jgufe 2
years because of lack of adequate statistical interpretaion of changes inconsumption and production patterns that may signal an increase in illegal wateruses.
BREAKDOWN OF COMMERCIAL LOSSESAS % OF COMMERCIAL LOSSES (50% OF TOTAL)
hM-llgsteu" Conn.lox m Vbl*'w
_ C lleetl n lossesIX
35. In Caracas, some 70,000 connections (30 percent of the total) are notregistered in the commercial system. In the Federal District of Mexico City,
more than 600,000 water connections (30 percent of the total) cannot beproperly accounted for, only about a third of the connections is metered and lessthan one-fourth of the meters is operative. In Panama, the increase in UPWfrom 37 to over 50 percent in recent years is, for the most part, due to anincrease in the number of illegal connections.
36. The magnitude of the neglect of operations in Mexico City, coupled withlow rates, requires a federal subsidy in excess of US$1 billion a year, equivalentto 0.6 percent of GDP, and equals the annual sector investment needed tosupply the total population of the country with adequate water and sanitationservices by the end of this century.
37. Inadequate maintenance affects meter accuracy and, thus, aggravates theproblem of commercial losses which, in turn, directly reduces the revenuestream of the utility. It also deprives it of vital information to operateefficiently. In Lima, for instance, only a handful of some 160,000 metersinstalled in the mid-1980s is operative today. As a consequence and in spite ofan adequate production of about 400 liters per capita per day, there iswidespread rationing (para. 24). The lack of maintenance of meters and of thecommercial system explains this deterioration. A recent evaluation of alternativewater saving schemes indicated that a program to meter consumption wouldproduce an economic rate of return in excess of 50 percent and well above anyother water supply alternative program, but sector authorities in Peru appear tobe lukewarm to an extensive metering plan.
38. The level of physical losses is also troublesome, and there is plenty ofevidence of the lack of maintenance of distribution network facilities in theregion. Pipes have not been replaced in many cities at rates to compensate forold age and physico-chemical deterioration. In Buenos Aires, for instance, 65percent of the pipes is more than 60 years old. In Lima, in the past few yearsless than 3 km of pipes have been replaced per year in a system with more than6,200 km of pipes. Aging problems are, of course, compounded by thecumulative effects of inadequate maintenance and repair. Pipe breaks in manydistribution systems often exceed accepted industry standards. In Medellin,Colombia, the number of pipe breaks is, on average, close to the level used inFrance (4 breaks/km/yr) as the signal to change a defective pipe (Table 6).Excessive breaks in pipes and connections also point out problems with thequality of materials, construction and excess pressures.
39. A utility confronted with high levels of UFW needs to fill the financialgap created by the non-paying consumers and the additional operating costs. Adirect consequence of high UFW is that paying consumers end up paying higherrates. This, of course, raises not only some equity questions but alsoreservations about the effectiveness of regulatory practices by tariff boardsacross the region.
1121Table 6
40. In Bogota, UFWincreased from 22 percent in1975 to 40 percent in 1989. F4 SRevenue losses due to theincrease in commercial (non- (No.II0V / )physical) losses have beenestimated to be equivalent toat least 25 percent of total .(1.76...)..07billings, or US$39 milion in (7382 #.161989 alone. If captured, : Y (8 0- X :these financial resourceswould have been more than M (88 -.adequate to meet al debt P L -# ;; 7service obligations (US$195million) during this period.Economic losses due to this L4 ...incease in UFW averaged US$10 million per year, or Bgt 9)2316 percent of the investmentprogram over this period (Annex 1). R ' .8
41. In Costa Rica, AYA (estimates a loss of income of ~ (8 .some US$8 million per yearon account of commerciallosses (13). This financialloss can be put into someperspective by noting that planned investments over the next five years averageUS$33 million per year for the whole country. In Cochabamba, Bolivia, areduction of UFW from 33 percent to 15 percent would increase revenues by24 percent. This amount is about double the amount that the water companypaid for aU its materials and supplies in 1989. In Guatemala City, which has apopulation of 1.5 million, a reduction of physical losses from 25 percent to 15percent over 10 years would reduce capital expenditures on new production byone-third. This savings is only slightly less than the amount that the companywill spend on total salaries and maintenance of the system. In Tegucigalpa, acity of 520,000 people in 1988, UFW is estimated to be 40 percent. A reductionof 3 percentage points would be more than adequate to provide water to aU lowincome areas that are forced to buy water from vendors at unit prices 16 to 35times higher than what users with a house connection pay to the local waterauthority (Annex 2).
42. In five municipalities (Cananeia, Registro, Iguape, Cataji and Juquia) ofSao Paulo State, with a served population of about 100,000, cutting commerciallosses in half would increase revenues by more than US$1 million a year. If, in
[13 1
addition, physical losses could be reduced to between 15 and 20 percent,operating costs could decrease by nearly US$1 mitlion a year. Thus, the netfinancial impact of maintenance neglect on these five towns is nearly US$2million a year, or close to US$90 per connection per year; the potential savingsrepresent twice the level of annual capital expenditures projected for theforeseeable future.
43. The lack of reliable data on where and when consumption is taidng placehas also hampered attempts to improve operations of the distribution systems ofmany cities, such as Mexico City, Buenos Aires, Lima, Panama City,Barranquilla and Guayaquil. Even in Brazil, where there is more awareness ofthe importance of metering, only 64 percent of all connections serviced by statewater companies was metered in 1984. Improper maintenance of software,particularly in the commercial area, also leads to unreliable assessments of UFWcomponents and to ill conceived and, therefore, ineffective plans to reduceUFW. Many such plans have been a source of disappointing results. In Lima,for instance, the water utility initiated in the early 1980s a program to reduceUFW under the assumption that the main cause of UFW was leakage of pipes.Millions of dollars and a couple of years later, an extensive leak detectionsurvey confirmed that the volume of leaks was negligible pointing, therefore,to problems in the commercial system. Unfortunately, this part of the UFWreduction program was not pursued with the same vigor, and the results are inevidence today (para. 23).
44. Unreliable production and consumption data have also led to poor demandprojections, usually overestimates, and therefore, to costly investments. ManyBank financed water supply projects have suffered from this problem; Bogota,San Jose and Guayaquil, to name a few, are cases in point.
THE MAUNTENANCE PROBLEM IN RETROSPECT
45. Many factors contribute, often in a synergistic way, to the lack ofadequate maintenance of most water and sanitation infrastructure in the regionand to poor services. An assessment of the factors that led to the currentsituation is important in order to establish potential solutions. These factors havebeen grouped to facilitate discussion, but it is recognized that most of them cutacross classification formats.
Insttional/Manag1ri
(a) Unclear roles of central and local government agencies.
(b) Low image of the O&M functions and uncertainties about the benefitsobtained by good maintenance.
(141
(c) Shortage of experienced managers and skilled technicians aggravatedby lack of formal training programs.
Qpmlonal
(d) Inadequate information on systems and costs.
(e) Misplaced investment priorities due to lack of adequate evaluation ofinvestments.
(f) Inappropriate designs and control of operations and infrequent use ofperformance indicators.
Budgetig/Financial
(g) Unhealthy dependency on central budgets.
Qh) Inadequate cost recovery policies that produce insufficient tariffs togenerate adequate financial resources.
46. Intemational lending and donor agencies have, at times, given wrongsignals or encouraged less than optimum investments, as they have not providedadequate support for the removal of long standing maintenance problems andadequate maintenance programs being in place before new construction projectsare supported. Bank appraisal and sector reports do make reference to problemson maintenance, however, only a few have attempted to quantify the magnitudeand the costs of this neglect. Many rehabilitation projects would benefit froma more comprehensive analysis of monitoring indicators of operations andmaintenance that can be used to gauge progress. Part of the problem, asmentioned in this report, is the lack of data, but a contributing factor is thatmost Bank staff working in the sector lack expertise in operations andmaintenance.
InsiMWional/Managerial
47. In most LAC countries, local governments are in charge, directly orthrough a specialized agency, of water and sanitation services. The role of thecentral and regional governments is more related to policy aspects, regulationof services and the provision of some [or all] of the funds for investment andoperations.
48. Central-local government relations, therefore, play a crucial role inoperatons and maintenance. However, the regulatory function of centralauthorities has been, by far, ineffective in most countries in promotingefficiency of operations and in demanding reliable information to supportinvestment decisions. Decision makers at the center are too far removed from
operational realities at the local level, and therefore, maintenance needs receivevery little attention in the central allocation of resources. The signals andsupport from the center have been erratic or contradictory at times in respect topolicies related to maintenance. New investment continues to receive moresupport than investment directed at rehabilitation.
49. Misguided subsidy and cost recovery policies have kept service ratesunrealistically low. Subsidies have been granted to support expansion ofproduction facilities when there was clear evidence of high levels of UFW andwater waste, all because of inadequate maintenance, but little or no funds wereallocated to redress these problems. Low service rates, in the name of socialconcern, have kept the poor from receiving a good service, as utilities have beendepnved of funds to maintain the quality of services and expand them (Annex2). The result has been poor maintenance and has led to higher operating costsznd inadequate services.
50. Institutional and managerial deficiencies often go hand in hand and areclosely interwoven. It is not uncommon to observe ill defined or overlappingfunctions in or across sector institutions. The lack of clear objectives and ofmonitoring indicators to assess progress in reaching them reinforces thisproblem, and accountability is lost. Accountability is also lost by publicadviAnistration controls of sector institutions that tend to be intrusive andobstructive and, in effect, make claims to autonomy rather perfunctory.
51. More often than not, inadequate managerial practices and uninspiring orinexperienced managers are an important cause of deficiencies in operations andmaintenance. Most sector officials lack an interdisciplinary perspective to fullyunderstand that poorly maintained and unreliable water and sanitation facilitiesare a drain on resources, that they hamper pu.bic, atnd private sector productivityand that they can be a health hazard. Many alv fail to realize that poorlymaintained water and sanitation systems have ; important and undesirableimpact on equity, as the poor are the most vulner.noe to deficient services.
52. The high turnover in managerial positions it ilirs institutional memoryand compromises long-term plans and strategies wl.ch affect the maintenancefunction the most. In-transit managers are not usually interested in thedevelopment and implementation of plans, such as maintenance, that bear fruitin the long-term. Lack of competitive salaries, inadequate personnel policies thatfail to attract competent managers and technicians and the lack of formaltraining are also factors that work agamst good maintenance programs.
Operational
53. Maintenance of water and sewerage works should be viewed as one phasein the design-construction-opertion process. New equipment or facilities canand should be designed and built for ease of operation and mantenance. Timely
[161
repairs reduce long-term operating costs and ensure the full life expectancy ofexisting facilities and equipment. Innovative operations sometimes can addcapacity for little cost and reduce maintenance needs. On the other hand, poorlytrained staff often exacerbate maintenance problems. Such is the case of watertreatment plant operators that fail to apply the right chemical dosages thusaccelerating the problems of scaling and corrosion of pipes and meters which,in turn, adds higher demands on their maintenance.
54. It is not uncommon to observe O&M crews in the field using improperprocedures because of lack of training, proper tools, equipment or materials. Amanagement audit in Costa Rica t1990], for instance, revealed that field crewswere losing 70 percent of their time on account of bad organization (50 percent)and inadequate tools or methods (20 percent). While standards and manuals formaintenance exist in industrialized countries, they are not widely known or usedby sector institutions in the region.
55. Maintenance staff is seldom taken into account in project planning, anddesigners often are not knowledgeable about operations. As a result, manyfacilities have been built without due consideration to the capacity of institutionsto operate and maintain them. Inappropriate designs for facilities select state-of-the art equipment but fail to take into account the human resources and fundsneeded to maintain and operate them. Failure to account for difficulties inimporting spare parts and maintenance equipment can also lead to a precariousreliance on such equipment which cannot be properly maintained and soon fallsinto disrepair.
56. Maintenance is often seen as a series of problems to be handled as thesituation demands, instead of a program requiring planning for future needs, andtherefore, the normal operational mode is "management by crisis" based on ad-hoc decisions. Methods for issuing and tracking preventive and correctivemaintenance are frequently inadequate. Preventive maintenance is not viewedas the cornerstone of the program but rather as "breakdown maintenance".Premature equipment failures are the inevitable result.
57. Only a handful of sector companies in the region have adequateinformation systems and the know-how to maintain them and have developedand make use of monitoring indicators to measure a system's performance. Asa consequence, most maintenance programs are hampered by lack of adequateinformation on the operation, on the condition and efficiency of the systems andon costs. Monitoring indicators of performance have proven to be valuable toolsto help document and pinpoint problems and costs. The systematic analysis ofpipe breaks in Medellin, for instance, has been followed by the revision ofspecifications for, and substitution of, pipes and changes in pressure zones mthe distribution system. As a result, the utility has seen the number of pipe andhouse connection breaks fall by 43 and 61 percent, respectively, in four years.in Brazil, the systematic analysis of consumption patterns and accuracy of
[171
METER SELECTION (AO PAULO)
Consu2wtion nof nth
14W ., . . ... .....
law . . ...... .
616 - .... ~.,...,....s¢,
aw. ........................................... . ...... ......L+ 23M ....
a 5 is as wsmotor "a. Caaoltg (Si..) "3/h'
= d Staudai R.vise& Stanaad
umr 4
consumption meters over a wide range of flows followed by a least cost analysisled to a change in guidelines related to meter size selection (Figure 4); metersare now selected to operate at higher flows (the cost of accelerated meter wearis more than compensated by the gain in meter accuracy). Some Brazilianregional companies using this strategy, reinforced with other programs, havebeen able to obtain a consistent reduction of UFW on the order of 1 to 2percentage points per year. In Costa Rica, a detailed assessment of UPW hasallowed the utility to identify concrete corrective actions and monitoringindicators and reduce water losses by some 9 percentage points in two years.
Budgeting and Financial
58. Many sector agencies have developed an unhealthy dependency on thecentral allocation of funds. This dependency increases the power of centralagencies but has made financial planning at the local level more erratic and,therefore, unreliable and by reducing accountability, undermines aU attempts atthe utility level to improve operations and maintenance.
59. Budgeting systems are often misused when they become a straight jacketto rational planning and an end by themselves rather than a managementoperational tool. Continuous pressures to control costs are often perceived asorders to reduce budget allocations, and the first casualty is almost alwaysmaintenance. This process goes on for years until the consequences are inevidence. Then, the often seen reaction is to increase grant financing of capitalspending to compensate for this neglect, and the cycle is repeated.
1:181
60. O&M budgets are often easy to cut because voters do not seeinfrastructure deterioration until it is often too late. Public officials, whounderstand that breakdown repair is eventually more costly than preventivemaintenance, are often forced to defer maintenance because of competition fromother priorities. Budget reductions in maintenance expenditures are almostalways a misguided and costly decision. Maintenance expenditures are a fractionof total O&M costs and, thus, represent a small percentage [under 15 percent]of the total life-cycle cost of a facility. But, as documented earlier, maintenancecosts have a substantial impact on the useful life and productivity of the assetin question.
61. The use of routine cost/benefit analysis to guide decisions on investmentprograms is a practice followed by only a handful of the utilities in the region.In failing to do so, many utilities tend to favor new construction overrehabilitation, and in the process, the cost of the investment program is raisedunnecessarily. In addition, facilities are often built without due consideration tothe cost or provision of funds for O&M.
62. Sector managers often tend to blame the poor finances of their companieson external factors over which they have little control. The poor financialcondition of the company, in turn, is presented as the excuse for maintenanceneglect. Although there is some truth to this perception, the fact of the matteris that the poor financial situation of most sector companies is aggravated byproblems of their own. The lack of liquidity, a testimony to inadequate cashgeneration and poor financial management, is accentuated by water losses thatoften exceed half the volume of total production and by the high number ofillegal connections. More often than not, however, the misallocation ofresources on non-priority investment programs and the amount of revenuesforgone by inadequate commercial practices can be, on absolute terms, largerthan the funds requested. The solution to aU these problems is well within themandate of sector companies.
A STRATEGY TO IMPROVE MAINTENANCE
63. Good maintenance is cost effective but does require a vision, a persistentand consistent effort and a consistent flow of funds. Perhaps more important,it requires strong commitment to provide excellent service. It also requires thatthe public and officials be kept informed about the costs and the benefitsinvolved in order to obtain their support for adequately funded maintenanceprograms. It requires good management information and accounting systems aswell. No single approach by itself is likely to be effective. More effectivemanagement alone will not get the job done. Technology will not save the day.Grant money may buy time, but it is unlikely to be a continuous and abundantsupply. The complexity of these systems and their attendant problems demandsa comprehensive strategy.
[19 1
64. The objective of operations and maintenance systems should be tomaximize benefits from existing assets. Effective managers of O&M tasks,therefore, need to be concerned about: (a) policies and strategies manifested inmulti-year plans; (b) financial resources provided on a sustained and timelybasis; (c) inventories and records of assets and their condition; and (d)sufficient staff with adequate skills and appropriate materials and equipment.
65. As noted earlier, there are biases against maintenance which have to beovercome. Policy and decision makers in the sector and in lending institutionsmust be convinced that maintenance is, indeed, an area worthy of priorityattention and that efforts to improve it very often represent the best use ofscarce resources.
66. The pervasiveness of the maintenance problem in the water industry inLAC is shared, albeit in different degrees, by all countries in the region, andit is not likely to disappear in the near future unless radical changes are broughtin. A strategy to improve crumbling infrastructure must incorporate other meansin addition to more funds and should focus its attention on actions intended to:a)j mp accountabigly; b) develop and maintain responsive managementinformation and data systems; c) im'sanalysis f investments and cost5cmm ; and d) improve training of staff. Maintenance can also be enhanced,and its cost reduced, by fostering the ma ation of the private sector andmaking the best use of its comparative advantages.
67. Progress in these fronts entails actions in the ManagwiaIJInstitutionalareas to clarify the respective roles of the central, regional and localgovemnments in the construction, management, financing and regulation of waterand sanitation infrastructure and to change management perceptions throughincentive schemes and managerial practices.
Accountability
68. The delegation of responsibilities for water and sanitation to sectoragencies needs to be followed by delegation of the necessary authority andpower to recover costs and mobilize resources to sustain O&M. Only then canaccountability be squarely placed at the operational level. Central governments,on the other hand, need to regulate services more effectively in order to promoteefficiency, to apply consistent policies concerning evaluation and cost sharingof investments and to remove the bias against expenditures on operations andmaintenance.
69. Dealing with operations and maintenance requires not only managerialskills but also entrepreneurial talent (16). High level managers should seek,therefore, more delegation of responsibilities to lower levels of the organizationto avoid getting inundated in details and to make a concerted effort to revert thepredominant mode of 'management by crisis" to management by objectives. In
1201Table 7
doing so, managers wil beless prone to bas their :;.:;: . s sa-s::decisions on political and S rfspur of the moment SOF&considerations rther tmn onobjective and technically ikQsound criteria.
70. The sense ofresponsibility andaccountability for operations 4:emerand maintenance is greatest.when the orgtion B
structure responds in arational way to current Wjproblems and when te staff is given clear and distinct usk in line with their skis,experience and interest andthe means to discharge tdirfunctions efficiently.
71. To improve the
I^foion~~~~~~~~~ .iystemseg
efficiency and effectiveness . t .
of the O&M funzct.ions, ..... *........,..
suitable mtyes of activities .should be clearly vested in .
accountability centers whichfunction as inten servicentfynptiur tolesome setinoutunits within the das#1*ya
orgniatin.Examples Of.0'*cteecenters are: meter
repair shops, vehicleworkshops, water treament facilities and inventory Ikmttedvstores. These centers shouldbe given clear goals and
indcatrsto monitor pefomaceand some flexibility in their operations inorder to give area managers the necesary mncentives for efficiency.
IWomuaion Systems
72. Most sector agencies need to assign resources for the development ofreliable and currnt records of existing faiihties and operations. These shouldinclude syste-matic recording and monitoring of mitncehistory for specificelements with a view to identifying particularly troublesome sections or units
1211
and curing the underlying causes rather than the symptoms. The technicalinformation should be complemented by reliable unit costs of maintenanceoperations and new facilities. Information on facilities and costs should, in tum,be used to develop indicators to help decide when a unit needs maintenance orshould be replaced (Table 7).
73. The costs of O&M can vary substantially from one utility to anotherdepending on a number of factors such as: (a) standards of design andconstruction; (b) degree of utilization and age of assets; (c) labor and energycosts; and (d) local geographic and environmental conditions. Because of thesefactors, 'rules of thumb" to guide O&M operations should be used with caution.
74. Data analysis and tracking involves more than just data collection; itrequires data management (data entry, storage and file interpretation). Computersoftware packages of management information systems are available, but theseprograms can rapidly become useless unless there is a concerted effort, at themanagement level, to provide the resources to maintain and keep them currentand to develop the administrative procedures to generate, analyze, disseminate,preserve and use this data.
Investments Analysis and Cost Recovery
75. The benefits of good maintenance accrue directly to the local authorityconcerned in terms of deferred capital investments, reduced operating costs,more predictable workloads and greater public satisfaction. Benefits also accrueto the users in the form of more reliable services, lower user costs and aestheticand health benefits. There are also indirect but important benefits in terms ofimproved public and private sector productivity.
76. There is an urgent need to apply more rigorous cost/benefit analysis tonew investments and maintenance expenditures. This analysis provides valuableinsights into the costs and trade-offs of both and can help to define priorities andcost effective programs (18). It is particularly relevant under the presentsituation of severe constraints on the availability of fiacial resources. Goodproject evaluation will also help avoid: (a) problems in the selection ofequipment because of lack of adequate consideration of resource constraints suchas foreign exchange, skills and facilities to service and repair, and (b) capital-intensive solutions which are unlikely to be appropriate in situationscharacterized by inexpensive and unskilled labor.
77. The O&M plaining, programming and budgeting process is iterative andbegins with the inventory and classification of assets. It is followed by theestablishment of quality standards of service to set the level of O&M to beprovided which, in turn, should be translated into quantity standards measurablein suitable units. These quantity standards are, in turn, translated into types andquantities of resource requirements some of which are controlled by inventory
[221
management systems. Such preparatory work, including cost/benefit analysis ofmajor expenditures, can help identify and rank preventive and routinemaintenance programs and their costs and support O&M budget requests.Budget exercises should be complemented by the analysis of actual allocationsand expenditures over, say, the last five years to determine trends and patternsand to guide future exercises.
78. With the use of applicable unit costs, the total costs of providing therequired levels of O&M can then be calculated and held against availablefinancial resources. These levels are likely to be achieved if goals and theassessment of resource needs are forward looking, framed in 3 to 5 year plansand complemented with specific and monitoring indicators to assess progress.Such evaluation of O&M requirements is a valuable tool to bring into focuspossible issues of the utility's finances and of resource mobilization efforts.
79. But investment analysis and planning of maintenance cannot go too far ifthe utility is under severe financial stress because it is not allowed to or does notattempt to recover its maintenance, operating and investment costs. A soundmaintenance strategy must include a sound financial one which includes not onlya forceful plan to have tariffs that reflect costs uut an equally convincing one forbilling and collection and for reducing unnecessary costs.
Training
80. The assessment of O&M problems should place greater emphasis on stafftrining needs and motivation and the possibilities for introducing betteremployment conditions. O&M issues among operational staff are compromisedby the low level of awareness of O&M and by the lack of recognition of bluecoilar occupations and inadequate vocational training.
81. The inadequate staffing of O&M functions is a critical and most difficultissue. The often poor working conditions and difficulties in reducing redundantstaff are obstacles to reconcile demand and supply of O&M skills through firingand hiring. A systematic training effort for existing staff is, therefore, a keyelement of any effort to improve O&M. The end result is that sector institutionsneed to take a more assertive role in shaping training programs to fill this void.Training, however, is not a panacea. It is equally important to target eachaudience to identify, define and evaluate relevant O&M issues and to determineif they are amenable to training solutions (Table 8).
82. Public education can go a long way to help improve the maintenanceeffort of a utility. Therefore, it is important that sector agencies make a strongereffort to develop and maintain public education campaigns to keep the publicand officials well informed on what the goals of the utility are, how they benefitthe public and how this public can contribute to make these goals a reality.Community participation can be elicited to report problems such as leaks,
1231Table 8
broken pipes and missing - - --manholes. This participationis also valuable to help TRINING FOR (M.reduce the loss of propertythrough vandalism. But, the 5.'.'. ,. .. .t Top.'"utility must show that it isresponsive to the public if it mk4La . ; : -wants to elicit a lastingparticipation. * -f bi .v
Private Sector Paticipation P ra-in O&M . ..........
83. In the quest for of* O&Wimproved quality of services * Asut vhA 4 eand cost-effectiveness of * M.O&M, it is important to 0W.dispel apprehensions that S . a bu4getu* .
might be in the minds of the :public and sector officials £DABCLWML)* U*BLZabout the participation of the *
private sector in O&M. The ix f
experience in many vcountries, such as France S ; ;afe;y
(17), Spain and the United ... .States and in the region, .. ._notably Chile, clearly showsthat this participation can beproductive and effective (16). In these countries, it has been demonstrated thatpdivate firms can provide many of these services more efficiently than publicutilities, owing to better management, greater flexibility and accountability andtheir ability to retain more skilled personnel.
84. The private sector can also be a source of additional financial resourcesprovided, of course, that a clear legal framework exists to allow and encouragethis participation. The positive experiences of many industrialized countries,particularly France and Spain, with the participation of the private sector in thefinancing of the water and sewerage sector should be emulated in the region.
85. The water utility of Sanfiago de Chile, EMOS, has been highly successfulin the use of private contractors for O&M functions. In 1989, some 34 O&Mcontracts were made with the private sector with a total cost of US$8 miUlion ayear, equivalent to 48 percent of total operating costs (excluding depreciation).Through this strategy, the company has been able to reduce costs and today iscredited as being one of the most efficient sector companies in the region interms of the number of staff per population served [included in this ratio is the
1241
equivalent number of staff employed by the private sector]. EMOS also reportsa reduction in response time, better quality of services and better attention tousers.
86. Areas of operations and maintenance where the participation of the privatesector has proven to be cost effective include:
* Meter reading and billing.* Meter installation and maintenance.* Collection of service payments.* Transport services.* Maintenance of equipment.* Maintenance and repair of water
and sewerage networks.* Maintenance and repair of house
connections.* Data processing centers.* Water and waste water treatment plants.* Pumping stations.
87. A service contract can, of course, include one or more of the tasksmentioned. All service contracts require adequate supervision by well trainedstaff to give particular emphasis to the timely resolution of problems that mayarise in performing the obligations under the contract. Timely payment ofcontract obligations is paramount to a successful contract.
88. Successful O&M contracts with the private sector should span severalyears, usually not less than five, to elicit a good response from potential biddersand to allow and justify a reasonable investment and commitment on the part ofthe contractor. These contracts should also pay particular attention to:
(a) a clear definition of contract objectives and delimitation of the areaof service.
(b) the obligations of the private company conceming standards andquality of service; to the extent possible, these should be quantified.
(c) the procedures to adjust contract prices including revision thereofwhen service or cost parameters exceed preestablished limits.
(d) the provisions for hand over and continuity of service at the beginningand end of the contract.
(e) the handling of staff employed by the utility when service is takenover by the contractor.
25 [
89. It should be recognized that private contractors are basically guided byprofit opportunities, and in order to achieve the desired objectives of quality andcost-effectiveness, the utility must retain very important responsibilities forplanning, packaging, procuring and supervision of contract works. It is also inthe interest of public utilities to provide incentives in O&M contracts with theprivate sector to encourage more cost effective services. On the other hand,private firms should face the real possibility of losing contracts or profitabilityfor inadequate performance. Equivalent incentives or sanctions generally do notexist for public agencies.
THE ROLE OF THE BANK
90. The water and sanitation sector in the region faces uncertainty in attractingcapital and managerial talent to finance the expansion and improvement ofservices, particularly if abatement of water pollution, likely to increase due tobetter water and sanitation, is to be taken into account. The need for resourcesis likely to be even greater if existing assets are not maintained properly.
91. Historicaly, the Bank has not been a key financier for the sector in LAC.its funding, although still expected to be substantial, is but a fraction ofinvestment requirements by the sector. It folows that the Bank's evolving roleis to assist in developing the ability of borrowing countries to mobilize resourcesneeded for their large investment requirements and to manage sector assets moreefficiently.
92. The Bank has played an important role by fostering institution building inthe sector and by assisting in developing the concepts of economic efficiency,financial sustainability and professional management through its advocacy ofleast-cost planning, economically rational tariffs and financially viable utilities.Nonetheless, in today's changing environment and tight financial resources moreemphasis needs to be placed on good management of existing assets beforeconstruction of new ones, on a large scale, is attempted.
93. The challenges that sector agencies are facing, insofar as improvingmaintenance practices is concerned, include the need for:
(1) greater accountability in the sector;(2) better information systems to guide operations in sector institutions;(3) more rigorous cost/benefit analysis of investment and maintenance
options;(4) better training of sector personnel; and(5) a more active participation of the private sector.
94. These challenges provide ample room for the Bank to help improve theperformance of the water and sanitation sector:
[261
* Operational efficiency is a aine qua n9n condition to investmentefficiency and, therefore, to the provision of services at reasonable cost.Adequate maintenance is at the core of this efficiency. The Bank's roleto promote efficient investments and operations should continue, ifanything, at a brisker pace.
* The Bank needs to bring to the forefront a more open and focuseddiscussion of maintenance problems in its sector work, public sectorexpenditure reviews and operations. To lend credibility to this effort, itshould be followed by holding back on lending for expansion of capacityin those countries or for those agencies which show distressing signs ofinadequate maintenance (high losses, poor water quality and service) untilcredible plans to redress the situation are firmly in place.
* While the Bank has supported efforts to establish financial targets,a more concerted effort is needed to develop adequate operational targets,as the latter determines, to a large extent, what happens to the former.Additional sector work is needed to develop adequate operationalindicators that take into account the range of size, area of service andtypes of services provided by water/sanitation utilities in the region '.
* To make an impact on these areas, the Bank needs to strengthen thecapacity of the Bank's sector staff to deal with maintenance issues in amore systematic and comprehensive manner.
* The Bank is in a privileged position to foster dissemination of theissues related to inadequate maintenance and concomitant problems. Thisdissemination effort by EDI, LATIE and the Operating Departmentsshould be channelled in a coordinated way to increase synergism.Seminars should be directed, primarily, at public officials in seniorpositions with the power to influence decisions.
* The Bank should also support governments more actively in theirefforts to improve accountability of public officials and institutions and amore transparent decision making process with broader publicparticipation. Regulatory agencies and tariff boards have a key role toplay but they are often in need of technical assistance to relate operationalperformance to rates. This is an area where the Bank has ample room toexpand its role.
1. The first LATIE (and Bank) sector report on this topicManagement and Operational Practices of Municipal and Regional Water
and Sewerage Companies in Latin America and the Caribbean" was publishedin August, 1989.
[27 1
* If a country decides that the best means to develop thewater/sanitation sector is to promote a more active participation of theprivate sector, the Bank will support the adoption of reforms tailored tothe particular situation. Nevertheless, the Bank has a stronger role to playin this area by helping disseminate more forcefully the good practices,both within and outside the region, of private sector participation in themaintenance and operation of sector utilities.
BIBLIOGRAPHY
1. Austin, John H., Jordan, James K. Operation and Maintenance of WaterSystems in Developing Countries. Journal AWWA, Vol. 79, No. 7. July1987.
2. Brown and Caldwel. Utility Infrastructure Rehabiliion. U.S.Department of Houaing and Urban Development, 1984.
3. Brunstein, Fernando. Crisis y Ser.icios Publicos. Agua y Saneamiento enla Region Metropolitana de Buenos Aires. Cuademnos CEUR. No. 23,1988.
4. Clark, Robert M. and James A. Goodrich. Developing a Data Base onInfrastructure Needs. Journal AWWA, July,1989.
5. Gutierrez, P. Dario. La Contratacion de Servicios con la ETnpresaPrivada. Estrategia de EMOS, Sandago, Chile. Conferencia Regionalauspiciada por el Banco Mundial. San Jose, C.R., Nov. 1989.
6. Hanson, Hugh. F.; Mueller, Uoyd M.; Hasted, Sally S.; Goff, David R.Deterioration of Water Quality in Distribution Systems. AWWA ResearchFoundation, Denver CO. Report No.90521. February 1987.
7. Jordan, J.K.; Buijs,P.; Wyatt, A.S.; Assement of the Operations andMaintenance Component of Water Supply Projects. US AID TechnicalReport No. 35, 90p. June 1986.
8. Jordan, J.K. Establishing a Maintenance Program. Journal AWWA, Vol.79, No. 8. August 1987.
9. Geldereich, Edwin E.; Kim Fox.; Invesdgation of the Microbial Qualityof Water Supplies. During the 1991 Cholera Outbreak in Peru. EPAReport, April 1991.
10. Kinnersley, D. J. Ensuring the operation and maintenance of water supplysystems. AQUA (U.K.) No. 3:14749, 1986.
11. Lorentzen, Jens. Overview of Issues and Stgy Options in Operationand Maintenance of Urban Infrastcure in Developing Counties. IBRD.OPS paper, 1987.
12. Pattison, P.L. Conducting a Regular Main Flushing Program. JournalAWWA the Vol. 72, No. 2. February 1980.
(291
13. Prado, Eladio. El proceso de Mejoramiento Operacional, La experienciade AYA. Conferencia Regional auspiciada por el Banco Mundial. SanJose, C.R., Nov. 1989.
14. Stump, Michael M. Contract Operations of Water Utility TreatmentFacilities by a Private Company. Proceedings AWWA 1985 Conference:Managing a Priceless Resource, Washington, DC. June 23-25 1985.
15. Wiseman, Robin. Will privatization Improve UK water quality. WaterWorks International, April 1989.
16. Yepes, Guillermo. Management and Operational Practices of Municipaland Regional Water and Sewerage Companies in the Latin Amerca andThe Caribbean. IBRD, INU Report 61, 1990.
17. Yepes, Gui1lermo. Private Sector Participation in Municipal Services: TheFrench Experience. LATIE Dissemination Note, Oct. 1990.
18. Yepes, Guillermo. Analisis de Minimo Costo. Revista ACODAL No.144, Abril-Mayo, 1990.
19. La Salud en Colombia - Medio Ambiente. Ministerio de Salud yDepartamento Nacional de Planeacion, 1990.
20. Consensus on Rebuilding America's Vital Public Facilities. The Labor-Management Group, October 1983.
21. Fragile Foundations: a Report on America's Public Works. NationalCouncil on Public Works Improvement. Final Report to the President ofthe United States. US Government Printing Office, Washington, DC.February 1988.
22. Public Works Infrastructure: Policy Considerations for the 1980s.Congressional Budget Office. Congress of the US. CBO Study. USGovern, ent Printing Office, Washington, DC. April 1983.
23. The Nation's Public Works: Report on Water Supply. National Councilon Public Works Improvement. Categories of Public Work Series.Prepared by Wade Miller Associates, Inc.
24. U.S. Congress, Office of Technology Assessment. Rebuilding theFoundations: A Special Report on State and Local Public WorksFinancing and Management. OTA-SET-447. Washington, DC, USGovemment Printing Office. March 1990.
ANNE 1Page 1 of 10
WATER SUPPLY AND SEWERAGE SECTOR
MANENANCE: THE COST OF NEGLECr AND OPTIONS TO IMPROVE IT
Case Study: The Cost of Unaccounted For Water in Bogota'
BACKGROUN
1. The Empresa de Acueducto y Alcantarillado de Bogota [EAABJ hasincreased coverage of water services from 83 percent in 1975 to over 97 percentin 1989 and of sewerage services from 78 to 96 percent over the same period.EAAB is also in charge of the storm drainage system. In 1989, EAAB had astaff productivity of 2.04 staff per thousand water plus sewerage connections.
2. The increase in service levels has been achieved by a consistent long-terminvestment strategy by borrowing from international organizations and suppliers'credits and by increasing pension liabilities. Over the period 1976-1985, EAABinvested US$904 million [current terms] of which 36 percent was internallygenerated. The Bank's association with EAAB began in 1968, and since then, theBank has provided US$253 million to help finance four investment projects.EAAB receives no national or local subsidie in support of its investmentprogram.
3. One blemish on the otherwise distinguished record of EAAB is its highUPW. For many years, management paid little attention to UFW, and theproblem grew worse. In the 1960s, EAAB's UFW averaged about 24 percent;it increased somewhat in the early 1970s, but it was brought down to 22 percentby 1975. Since then, UFW has steadily increased; it reached 40 percent in 1985and has remained in the 40-45 percent range ever since. The evolution of UFWin EAAB as well as other pertinent production and consumption data is presentedin Table I and Figure 1. Only in the past two years or so has EAAB began topay serious attention to the reduction of its UFW and renewed its efforts to bringthis problem under control.
1. This note is not intended to describe possible actions to reduce UFW.
Page 2 of 10
4. No hard data is available to alow a detailed breakdown of past UPWfigures. Recent studies 2 tend to suggest that most of the increase it UFW isassociated with problems in the commercial area related to unregisteredconnections and loss of meter accuracy. These studies helped to provide abreakdown of the existing level of 40 percent UFW:
a) physical losses, 9 percent,b) macrometering losses, 5 percent,c) micrometering losses, 9 percent, andd) illegal connections, 17 percent. 3
5. While water connections increased by 127 percent from 1975 to 1989 andconsumption volumes by 57 percent, production increased by 104 percent as aresult of an increase in UFW from 22 to 40 percent. During the same period, unitconsumption decreased from 56 m3 per connection per month to 35m3/connec/month.4
ECONOMIC AND FINANCU COSTS
6. In order to quantify the costs of this increase in UFW, the 1975 UFWfigure of 22 percent has been taken as the reference level. The implicitassumption is that this level of UFW could have been maintained by a sustainedmaintenance effort of both the physical and commercial system infrastructure.This reference level does not avoid further arguments as to the feasibility and costeffecdveness of reaching even lower UFW levels, but this analysis is beyond thescope of this case study.
7. The additional costs attributable to an increase in UFW can be grouped intothree main categories:
2. EAAB. Estudio del Control del Agua no Facturada. Informe Final704-01-IG-12. Dec. 1989.
3. There is some evidence that the highly progressive rate structure inBogota may have contributed to the rise in illegal consumption. Someconsumers in the high rate (and consumption) brackets may haveresorted to ilegal means to reduce their water bills.
4. This decrease in unit consumption is attributable to two main factors:an increase in the number of low income population served with houseconnections and to price elasticity (-0.27) effects.
,ANt,Page 3 of 10
a. Operational costs associated with the incremental production tocompensate for the increase in UFW.
b. Additional costs incurred because new production facilities had to beadvanced to meet additional demand requirements.
c. Loss of revenue due to an increase in commercial losses.
8. There are economic costs, as mentioned earlier, associated with a and k.As indicated previously, there are economic costs associated with _ as well. Althree categories affect the finances of EAAB and, therefore, its financial capacityto tackle its ambitious investment program.
Additional Production Costs
9. The difference between the actual and the reference level of UFW isconsidered as "excess" UFW or production. This "excess" volume represents anadditional quantity that had to be produced to compensate for a loss inproductivity. Over the fifteen year period, this additional production was 988Mm3 or 66 Mm31year on average (2.1 m3 per second).
10. Based on EAAB's operating cost data, only about 30 percent of theoperating costs [depreciation and debt service excluded) can be directly relatedto the level of production (short-term marginal cost). Therefore, the economic Iand financial costs associated with this "excess" production amount to US$33million over this fifteen year period [see Table 2 for calculations]. These costswere, for instance, US$4.3 million in 1989.
Loss in Revenue
11. The portion of the UFW attributable to commercial losses (unpaidconsumption) also affects the financial position of EAAB, aa it represents waterconsumed but not billed. All of these losses can be considered, in theory, ascapable of being captured as revenue by the sector agency. Commercial lossesrepresented 65 percent of all UFW in 1989. Over the fifteen year period (1975-1989) commercial losses have been estimated by assuming a) that the ratio ofcommercial to total losses remained constant at 65 percent or b) that the level ofphysical and macrometering losses remained constant at the 1989 level (14percent) and the rest, by definition, represents commercial losses. The outcome
5. Economic costs are somewhat higher, as electricity rates are belowmarginal cost in Colombia. Pumping costs, however, are notsubstantial and, therefore, have not been quantified.
ANNEX 1Page 4 of 10
is not very sensitive to either assumption, and the reported values are the averageof the two.
12. Although the distribution of the "unpaid" consumption among differentusers is not known in detail, a first approximation to the corrponding loss ofrevenues can be obtained by assuming that aU this water could have been sold atthe average rate.6 The corresponding financial cost in terms of lost revenuesduring this period is US$319 million [current terms] [see Table 2 forcalculations]. The corresponding value for 1989 is US$39 million.
13. The economic losses derived from this "excess" unpaid consumption beyondthe optimal point (at which price equals marginal cost) are somewhat more elusiveto quantify. Taling into account that the long-term incremental cost is aboutUS$0.29/M and that about 65 percent of the "excess" losses is attributable tofaulty meters and illegal consumption, the economic cost of this increase inconsumption is estimated at US$19 million over the period 1975-1989 (Figure 2).
Anteiciate Investments
14. The Chingaza project was implemented to increase production and treatmentcaacity at a cost of US$182 million 7. Its main components were completed in1982.
15. As shown in Figure 1, the "excess" production represents a volume that hadto be produced to compensate for the increase in UFW. This lost volume in 1989,for instance, would have been adequate to supply the needs of 1.7 million peopleat the average consumption rate (and 22 percent UFW). Consequently, additionalcapacityhad to be brought on line in 1982. In other words, had EAAB been ableto maintain UFW at the low historical level of 1975, the construction ofadditional production capacity could have been delayed by some 7 years. Thesavings, therefore, from a 7 year postponement of the Chingaza prqject (10% rateof discount) would have been US$89 million.
6. Includes water and sewerage charges, as both are linked to waterconsumption.
7. PCR report Second and Third Bogota Water Supply Prqjects. April1988.
Page 5 of 10
RllatulatiQn
15. The extra costs and loss of revenues (in current terms) incurred during theperiod 1975-1989 because of the undesirable increase in UFW can besummarized:
Factor Economic and Financial Costs1975-1989
million of US$
Economic Financial
Production Costs 33 33Anticipated Investments 89 89Non paid consumption 19 319
16. These costs can be put in perspectve by looking at EAAB investments anddebt service obligations during the same period. From 1975 to 1989, EAABinvested US$904 million and aggregate payments for debt service obligationswere US$195 million. The net financial loss is equivalent to 42 percent of alloperating income and to 1.13 times the total internal cash generation during thisperiod.
-IPage 6 of 10
BOGOTAUNACCOUNTED FOR WATER
Million M3/Year
550-to 802 from 1982
Product Ion
450 - Installed Capacity
35 -0
250 -
Consumpt ion
1 950 1999119
L 1975 1977 1979 1981 1983 1985 1987 1989
Page 7 of 10
Table 9
LI
[email protected] W*ci��r *.ww�.�..-'.-3/y..r�-- 2 V�IumMIL (004) a� £000) a
1fl�$ .�49 3*2 �*$� $03 £?*� 253 *24 36�975. MS. 203.22�d.401977 $ $1 369 �t�) . $47.. (��) 173 71197* (*6k .... 299 20* 30A 91.1979 3JY 4*4 (90) :.�.#� � 314 *09 3S�4 *0519 $9�� . . . I
� 35$ 239 3Z�3*95* .. 259.S2�g.fly.198$ 4J* 3*8 (94) � �rgyy. 4� 241 3D��9 �1954 (96) . .40? 240 34 0 14719*5 4� fl 59$ (p6) $31 � *57 394 167
269 404 1.531q87 4 94 439 *zj ..6�3 (*�) 47419*8 (97) . 499 2*0 43.9 2*9
.�.(�i �5.64* 3,435 334 Z,OL�
... � .. pe�Z.�oix �n m4Umw.I6kie� m�.tttioii* itt
� #4�'V4d. A*� p.rcenti
ANNEX-1Page 8 of 10
Table 10
10J9.. .. ..
-, .<~~~~~~~~......... ......
g~~~ ~ ~
Av4t*5g | |.'lff,,:.......
lt .. .;~~~~~~~~~~~~~~~~~~~~~~~~~~~~.....
I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Page 9 of 10
Fre 6
ECONOMIC COST OF ILLEGAL CONSUMPTIONPrice
NotoM4d Demand
Economlc Cost teotiv demand
p~~~~~~~~~~~
Net Economic Loss
---- conmeoial losses ---- Quantity
I |~~-
Page 10 of 10
Table 11
1w~i.M eapod~oc o a 99
ANNEX-2Page 1 of 4
WATER SUPPLY AND SEWERAGE SECTOR
MAINTENANCE: THlE COST OF NEGLECI ANJD O1tIOS TO WIMPOV 11
CaeStudy: The Cost of an Unreliable supply in Tegucioalpal
1 Water and sewerage services in Tegucigalpa, Honduras, are provided bythe National Water and Sanitation Company (SANAA). The city suffers from ashortage of supply and intermittent service aggravated by high UFW. This hascaused households to instatl their own backup systems where affordable and touse vendors.
2. In 1986, production, sales and UFW for Tegucigalpa were as follows:2
Total city population 520,000Population in Barrios Marginales 250,000Total Water Production, Mm3/year 35Total Water Sales, Mm3/year 21UFW, Mm3/year 14UFW as % of production 40Average Water Price, US$/m3 0.25Total Revenues, US$ M/year 5.2
3. Nearly half of the population was in barrios, most of which are located inthe hills surrounding the city at elevations up to a few hundred meters above themain city. The high level of UFW made it impossible to entirely meet the demandof the barrios, and because these people were poor, they had no alternativesexcept to use vendors. Unreliable service, on the other hand, affected both thebarrios and the formal sector, many of whom in the formal sector installedbackup systems. Because good quality groundwater is deep, most of the backup
1. Prepared by Professor Donald T. Lauria, University of NorthCarolina, Chapel Hill, N.C.
2. Data from "Report to PAHO on Non-Conventional Solutions for WaterSupply to Barrios Marginales in Tegucigalpa, Honduras" by Lauria,dated March 1986 and "Water Vending and Development: Lessonsfrom two Countries", WASH Technical Report No.45, by Whittngton,Iauria, et al. dated May 1988.
ANX2Page 2 of 4
systems consisted of storage tanks that were filled either by system pressure ora pump that withdrew water from the distribution network; private wells wero lesscommon, although data on this are not available.
4. The population can be categorized according to the level of water supply;in decreasing order of service, the categories are:
(000)
1. Formal sector 2702. Barrios with house connections 1443. Barrios with mixed service 254. Barrios with public taps 585. Bafrios with no piped system 23
The Cost of an Efficient System
5. All the households in category 5 used vendors to meet their basic waterneeds. On average, they consumed 20 liters per capita per day (ed). During the6-month dry season, they purchased water from vendors at a price of USS8.5/m3(35 times the official SANAA price). During the 6-month rainy season, theyobtained most of their water from roof catchments and other froe sources.Consequently, the amount these households paid to vendors in 1986 was aboutUS$700,000.
6. For households in category 4, there was a tap for each 1,000 to 1,500persons. Hence, under the best of circumstances, service was poor and requiredlong queues (average collectton time was one hour per day in the rainy seasonand 1.5 hours per day in the dry season). Hence, these households spent about7,800 hours per day collecting water from public taps. Based on the minimumwage rate of US$2.0 per day (US$ 0.25/hour), the cost of this waiting isconservatively estimated at US$400,000 per year. About half of the householdsin this category purchased from vendors in the dry season, and they obtainedwater free in the rainy season. These households used an average of 20 lcd andpaid vendors about US$900,000 a year. The other half of the poplation in thiscategory obtained their water from publc taps in the dry season and got frvewater in the rainy season. However, the price paid to "aguaprice at the publictaps was US$ 4.0/m3 (16 tmes the official SANAA price). Hence, for usingthes publc taps, these households pd about US$400,000 a year. SANAA, inursn, was reimbursed at its official price.
Page 3 of 4
7. Households in category 3 had a mixture of private connections, public taps,or no piped service, in which case they used public taps or neighbors. It isconservatively estimated that half the houses purchased 20 lcd from private tapsduring the rainy season for which they paid about US$200,000 per year.Households with pdvate connections paid the official price to SANAA.Households in categories 1 and 2 obtained all their water from the SANAAsystem.
8. The table on the following page summarizes how basic water needs weremet and the cost incurred. This table shows that payments of about 80 percentof the population (categories 1 and 2) amounted to US$13 per year per capita.The remaining 20 percent of the population (categories 3, 4 and 5) paid to"aguaterosw and public vendors an average of US$21 per year per capita.
9. In the report to PAHO, it was atimated that a stand alone deep well systemservig publc taps with 200 users each could be consa.uctd for TTS$30 percapita, an amount similar to what households in catego.6= 4 and 5 paid tovendors epach for the same quantity of water. Hence, by constructingindependent well systems costs to consumers could be reduced from US$30 toUS$6 per year per capita or a net savings of almost US$2 million a year,equivalent to 40 percent of SANAA's annual revenues. It should be emphasizedthat the basic water needs of people cannot be met from the SANAA system dueto the high level of UFW.
The Cost on an Unreliable System
10. Households in category 2 were too poor to afford backup systems and forthe most part, chose not to purchase water from vendors because of high prices.As a result, they simply iearned to live with unreliability and collecting andstoring their water in 55-gallon drums whenever there was pressure in the system.Households in this category and a1 other categories in the barrios generally had
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two drums each for storage, which costs about US$5 per drum. Altogether, therewere about 45,000 households in the barrios, which, at US$10 per household,spent nearly US$0.5 million on drums for storage.
11. The population in category 1 comprises 48,000 households and had the bestwater service in Tegucigalpa. Nevertheless, many of these households sufferedfrom unreliability during the dry season, which caused them to instal their ownbackup systems. Some of these systems consisted merely of storage tanksconnected to the distribution system, sometimes equipped with float valves. Thesetanks cost about US$100 each. Other systems included a pump in addition to thetank, with a cost of about US$300 each. It is likely that some 60 percent of thehouseholds in this category had tanks, and therefore, they spent between US$3million for the simpler version of the tank and US$9 million for the type with thepump.
12. By the way of comparison, in the report to PAHO it was estimated that awell 300 meters deep to serve 1,000 people with 250 lcd would cost aboutUS$20,000. Hence, for an equivalent expenditure of US$6 million it would bepossible to construct 300 wells that could serve 300,000 persons which is morethan the entire population in the formal sector.